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The Spirit of Capitalism: Nationalism and Economic Growth

Author(s):Greenfeld, Liah
Reviewer(s):Lal, Deepak

Published by EH.NET (February 2003)

Liah Greenfeld, The Spirit of Capitalism: Nationalism and Economic

Growth. Cambridge, MA: Harvard University Press, 2001. xi + 541 pp. $45

(hardcover), ISBN: 0-674-00614-3.

Reviewed for EH.NET by Deepak Lal, Department of Economics, UCLA.

I found this prolix book by Liah Greenfeld, a Professor of Political Science

and Sociology at Boston University, both confused and confusing. She states

that her book attempts to answer two questions: “(1) What was the direct cause

of the emergence of modern economy; that is what explains the sustained

orientation of this economy, which distinguishes it from all others, to growth?

(2) What made the economic sphere so central in the modern, and in particular

American, consciousness that our civilization can in truth be called an

‘economic civilization’.” Her answer is “that the factor responsible for the

reorientation of economic activity toward growth is nationalism, and that the

unprecedented position of the economic sphere in the modern consciousness is a

product of the dynamics of American society, in turn shaped by the singular

characteristics of American nationalism” (p. 1).

She tries to establish these claims by extended excerpts from secondary sources

concerning economic thought and development in England, Holland, France,

Germany, Japan and the United States. In all these cases, she claims, except

for Holland, nationalism was the prime mover in creating capitalism, in

contradistinction to other sociologists and historians (Gellner and Hobsbawm)

who believed nationalism “to be caused by capitalism and

industrialization” (p. 4). As she explicitly eschews both the historian’s craft

as well as the economist’s, it makes it particularly difficult to review such a

book to an audience of economic historians. Even though many of the excerpts

she quotes are interesting in themselves — and I particularly enjoyed those

from Japan and the US — they do not in themselves provide a substantiation of

her thesis. In the circumstances the only recourse is to try and determine her

general argument and see how it matches up with the evidence from not only

economic history but also the economics of developing countries, which is

intimately linked to many of her preoccupations.

The trouble I had with the book starts with the first of the questions she has

set herself. She seeks the causes of the emergence of the modern economy, which

she sees as its sustained orientation to economic growth. But this definition

of modernity would only be applicable at best to the last 150 years. After all,

the nineteenth century classical economists were still preoccupied by the

stationary state! Moreover, this question is different from the one that Max

Weber asked and which is the title of her book, namely about the origins of

Western capitalism, which is linked to the question of the great divergence

between the ancient agrarian civilizations of Eurasia. This question in turn is

different from the subsidiary question: why within Western Europe, England

blazed the path to modern economic growth? Greenfeld’s book is largely about

this second question and not the first. This confusion is responsible for her

vacuous definition — for an economist — of modern economic growth.

Development economists and economic historians distinguish between

extensive growth — which has been ubiquitous through human history —

with output rising pari passu with population, and intensive growth,

which results in a sustained rise in per capita income. Moreover, two types of

intensive growth need to be distinguished which I like to call Smithian and

Promethean (see Lal 1998). The first can and has occurred even in agrarian

economies usually with the establishment or extension of empires, which by

bringing hitherto autarkic regions with differing resources into a common

economic space lead to the gains from trade and specialization emphasized by

Adam Smith. But as the primary factor of production in agrarian economies –

land — was ultimately fixed, diminishing returns would set in, which combined

with the Malthusian principle would end this spurt of Smithian intensive

growth. As E.A. Wrigley (1988) has rightly emphasized, it was the substitution

of mineral energy resources, which were in virtually perfectly elastic supply,

for the land-based sources of energy in the organic agrarian economy, which led

to unbounded intensive growth of the Promethean kind. It is the latter which is

the hallmark of modern economic growth.

The spirit of capitalism, which Hicks (1969) emphasized is embodied in the rise

of the merchant and a mercantile society, predates the emergence of Promethean

growth. The torch of this spirit passed from the Greek city states, the

mediaeval Italian city states, the Hanseatic league and Holland to the United

Kingdom. Greenfeld recognizes this. So clearly for her, the spirit of

capitalism, which she identifies as arising with nationalism in

sixteenth-century England, could not be merely the prevalence of this

mercantile economy. As regards Weber’s question about the date and origins of

the great divergence, I have argued (Lal 1998) that it is associated with two

Papal medieval revolutions, which generated a value unique to the West –

individualism — and all the legal infrastructure needed for a functioning

market economy (see Goody 1983 and Berman 1983). But, though perhaps

preconditions, these factors did not by themselves generate Promethean growth.

It was the spirit of capitalism allied to the switch from an organic to a

mineral energy based economy which did, in Holland and then in England — even

in their agrarian economies — from the fifteenth and sixteenth centuries and

then with the scientific revolution in England in the new industrial economy

from the eighteenth century that generated Promethean growth.

On this view, Greenfeld’s discussion of the rise and decline of the Dutch

mercantile economy will seem perverse. As she rightly notes, the Dutch grew

rich through adopting a truly mercantile capitalism (which generated Smithian

growth). What she does not emphasize (only noting it in passing) is that they

also saw Promethean growth based on using deposits of peat to convert their

organic into a mineral energy based economy (see Wrigley). Their relative

decline arose as, unlike the much more abundant mineral energy source in

England — coal — the stock of peat was soon exhausted and the Navigation Acts

impeded the importation of English coal. Greenfeld, however, attributes the

Dutch decline to a failure to foster nationalism. But here is what Angus

Maddison (2001) (whose 13 pages (pp. 75-88) provide a much more succinct and

accurate account of the rise and decline of Holland) has to say: After the

Dutch revolted against the Hapsburgs in 1580: “they created a modern nation

state, which protected property rights of merchants and entrepreneurs,

promoted secular education and practiced religious tolerance” (p. 20 emphasis

added). But this nation state did not practice economic nationalism — i.e.

mercantilism. And there’s the rub.

For Greenfeld asserts: “There was no national consciousness in the Dutch

republic, the identity of the Republican Dutch was not national, and the

republic was not a nation” (p. 96). By this she means they were not economic

nationalists, as becomes clear when she writes: “It is this difference in

perspective, in the nature of identity, that explains … why the Dutch rather

consistently … advocated free trade in the face of perfectly consistent

protectionist (or ‘mercantilist’), measures their neighbors directed against

them” (p. 101). That, in her view, the Dutch decline was due to their not being

economic nationalists (i.e. mercantilists) is made clear by the title of the

subheading that follows “The Costs of Economic Liberalism” (p. 101). This book

is thus ultimately a mercantilist tract.

Greenfeld rightly cites the great Eli Heckscher, who in his magisterial book

Mercantilism argued that mercantilism was used by the absolute

monarchies in Europe after the Renaissance to consolidate their power by

incorporating various feuding and seemingly disorderly groups, which

constituted the relatively weak states they inherited from the ruins of the

Roman empire into a nation. Its purpose, he argued, was to achieve “unification

and power,” making the “State’s purposes decisive in a uniform economic sphere

and to make all economic activity subservient to considerations corresponding

to the requirements of the State.” But, what Greenfeld fails to mention is that

Heckscher (1955) went on to show that, the unintended consequence of

mercantilism was that this attempt to use it to establish order bred disorder,

as the attendant dirigisme bred corruption, rent-seeking, tax evasion

and illegal activities in underground economies. The most serious consequence

for the State was an erosion of its fiscal base and the accompanying prospect

of the un-Marxian withering away of the state. Economic liberalization was then

undertaken to restore the fiscal base, and thence government control over what

had become ungovernable economies. In some cases — as in France — the change

only occurred with revolution (see Aftalion 1990). Paradoxically, as Heckscher

noted: “great power for the state, the perpetual and fruitless goal of

mercantilist endeavor, was translated into fact in the nineteenth century. In

many respects this was the work of laissez-faire. … The result was attained

primarily by limiting the functions of the State, which task laissez-faire

carried through radically. The maladjustment between ends and means was one of

the typical features of mercantilism, but it disappeared once the aims were

considerably limited. … Disobedience and arbitrariness, unpunished

infringements of the law, smuggling and embezzlement flourished particularly

under a very extensive state administration. … It was because the regime

de l’ordre bore this impress that disorder was one of its characteristic

features” (p. 325).

There is further evidence against the thrust of Greenfeld’s main argument that

mercantilism is needed for economic growth. We now have the experience of over

fifty years of neo-mercantilist policies in the Third World, motivated in large

part by the same desire for ‘nation-building’ — carried to even further

extremes in the former Communist countries. The outcomes have been much the

same as with the mercantilist countries of yore. The disorder bred by

dirigiste neo-mercantilist policies has led to the recent wave of

economic liberalization, which no doubt Greenfeld — judging from her epilogue

– would deplore. (See Lal and Myint 1996, and Lal 1985 and 2000.) Moreover,

nationalism was a common attribute of the ideology of most developing countries

after the Second World War. Hence, it in itself could not be an explanation for

the manifest differences in their growth outcomes. What differentiated their

performance was the extent to which they followed mercantilist policies. Though

none apart from Hong Kong followed the classical liberal policy of

laissez-faire and free trade (and its performance was perhaps the best (Lal and

Myint 1996), the closer they were to this prescription the better the outcome.

Thus neither the distant (as Greenfeld seems to claim) or more recent past (as

is implied in her epilogue) provides any justification for what it turns out is

really her main message: economic nationalism (a.k.a. ‘mercantilism’) fosters

modern growth. All the evidence is to the contrary. But, having eschewed both

history and economics, Greenfeld blithely ignores all this. Weber, the

sociologist who took account of both, would I am sure be appalled by this

travesty, which the publishers in their publicity leaflet advertise as “Moving

Beyond Max Weber”!

References

F. Aftalion (1990), The French Revolution: An Economic Interpretation.

Cambridge University Press, Cambridge.

H. J. Berman (1983), Law and Revolution: The Formation of the Western Legal

Tradition. Harvard University Press, Cambridge, MA.

J Goody (1983), The Development of the Family and Marriage in Europe.

Cambridge University Press, Cambridge.

E. Heckscher (1955), Mercantilism, 2 volumes, revised second edition.

Allen and Unwin, London.

J.R. Hicks (1969), A Theory of Economic History. Clarendon Press,

Oxford.

D. Lal (1985/2000), The Poverty of ‘Development Economics.’ Harvard

University Press, Cambridge Mass; revised second edition, MIT Press, Cambridge

Mass.

D. Lal (1988), Unintended Consequences: The Impact of Factor Endowments,

Culture, and Politics on Long-Run Economic Performance. MIT Press,

Cambridge Mass.

D. Lal and H. Myint (1996), The Political Economy of Poverty, Equity, and

Growth: A Comparative Study. Clarendon Press, Oxford.

A. Maddison (2001), The World Economy: A Millennial Perspective. OECD.

Paris.

E.A. Wrigley (1988), Continuity, Chance and Change: The Character of the

Industrial Revolution in England. Cambridge University Press, Cambridge.

Deepak Lal is the James S. Coleman Professor of International Development

Studies at the University of California — Los Angeles. His most recent book

was Unintended Consequences: The impact of Factor Endowments, Culture and

Politics on Long-Run Economic Performance (MIT, 1998). He is currently

working on a book on globalization and order.

Subject(s):Markets and Institutions
Geographic Area(s):General, International, or Comparative
Time Period(s):General or Comparative